Letting profits run versus selling at target price

[cynic]

Precisely why I have not followed the Fundamental Trading methodology.
If the pros get it wrong more often than not what hope have I got?

That's the great thing about negative expectancy. All one has to do is put oneself on the opposing side of their trades and "voila".

 

[McLovin]

The very fact that so many analysts disagree on IV and price targets indicates to me that it's a discretionary method that requires a fair amount of self-belief on the part of the value investor.

Analysts or pundits? Analysts get things right most of the time, but they every now and then make glaringly obvious mistakes. Also they don't spend much time in the small end of the market. I don't know too many people who take sell side analysts' price targets very seriously. I read their reports because they usually have some useful info, but I have never bought or sold something because an analyst report said it was cheap/expensive.

Pundits on the other hand, well they get asked for an opinion so they give one. They write off entire sectors because they're not in fashion.

 

[Ves]

If the pros get it wrong more often than not what hope have I got?

I think differently - If the pros always got it right then how on earth would anyone else make any money?

Their mistakes are opportunity for others.

 

[DocK]

Analysts or pundits? Analysts get things right most of the time. I don't know too many people who take sell side analysts' price targets very seriously. I read their reports because they usually have some useful info, but I have never bought or sold something because an analyst report said it was cheap/expensive.

Pundits on the other hand, well they get asked for an opinion so they give one. They write off entire sectors because they're not in fashion.

No, I was talking about broker's analysis. Quite often they'll all fall within a tight range, or agree, but on some occasions they can vary quite a bit - I guess often due to their predictions for the industry concerned. If you think the iron ore price is going to fall and stay low or rise to all-time highs, then that will colour your value for stocks in that industry won't it? I know the liklihood of me predicting such things with any consistency is low, so I prefer to just follow the crowd.

I've actually just been watching last night's YMYC, and the three panellists are the most gloomy, conservative bunch they've had on for a while. They've just written off as "dogs" two shares I own, which are still in uptrends, and advised a caller to sell another as it's way over their calculated full value so therefore the smart thing to do is to sell and take profits. I'm going to do the opposite and continue to hold my "dogs" while they continue to rise in price, and have no intention of selling IIN until it takes out its prior pivot low. I guess history will tell whether they were right or I am - but I prefer not to sell based on calculations or predictions - I want to stay on the ride until it's over.

 

[McLovin]

No, I was talking about broker's analysis. Quite often they'll all fall within a tight range, or agree, but on some occasions they can vary quite a bit - I guess often due to their predictions for the industry concerned. If you think the iron ore price is going to fall and stay low or rise to all-time highs, then that will colour your value for stocks in that industry won't it? I know the liklihood of me predicting such things with any consistency is low, so I prefer to just follow the crowd.

That's a fair point, but then again, I don't think anyone knows where the price of iron-ore is going in the near term. I think it's going down and have been saying so for a while, but I have no idea when that will happen. Obviously, it's of no use to tell someone asking for advice "I don't know the answer" because they'll go to someone who will give them an answer, so instead they have to develop a hypothesis for what should be unknowns. I just avoid mining stocks.

I've actually just been watching last night's YMYC, and the three panellists are the most gloomy, conservative bunch they've had on for a while. They've just written off as "dogs" two shares I own, which are still in uptrends, and advised a caller to sell another as it's way over their calculated full value so therefore the smart thing to do is to sell and take profits. I'm going to do the opposite and continue to hold my "dogs" while they continue to rise in price, and have no intention of selling IIN until it takes out its prior pivot low. I guess history will tell whether they were right or I am - but I prefer not to sell based on calculations or predictions - I want to stay on the ride until it's over.

Yeah, YMYC, seems to be pundits. While they have a small circle of stocks they may know about, they do often seem as though they are answering questions about a company they know nothing about. It doesn't mean they are bad investors, they just have to provide an answer because it's television. I couldn't provide you with an intelligent answer about 98% of the companies listed on the ASX, I still do alright because where I put my money I have done my research.

 

[robusta]

I think differently - If the pros always got it right then how on earth would anyone else make any money?

Their mistakes are opportunity for others.

The pros also in the main have a vested interest in turnover, how many times have we seen a stock go from a buy to a hold to a sell then back to a buy. Repeat the process enough and the house makes all the money.

Add to that short term thinking from the pros, I am sure I read a sell recommendation on CSL 18 months ago because of the high Australian $ and global uncertainty. There's plenty of opportunities for the patient investor.

 

[herzy]

Discretionary. Some of the basic criteria are:

Low or no debt

Market Cap > $1m

Increasing EPS
Increasing DPS

Good liquidity

Yield > 5% ff

Established company with record of sound management.

Entry - uptrend.

Exit criteria will vary company by company. Stop will be much wider on e.g. one of the big banks than on smaller companies.

Sounds pretty good - out of interest, if you are stopped out of a company with good liquidity, increasing EPS and DPS, yield has obviously become bigger, and management remains the same - will you buy back in at a lower price? If so, under what circumstances? Say you had a 5% trailing stop loss, would you buy back in if it has dropped 20%? Or only buy back in on another uptrend, irrespective of price (subject of course to yield)?

 

[RottenValue]

Another very interesting thread on a topic that probably takes up more mind share for me than when to buy.

As a 95% FA (admit to glancing at charts following committing to buy decision), I have found that best approach to selling is to follow same rules that I used to buy.

Buying for me is based around having a strong degree of confidence that purchasing stock XXX at Price $n.nn is highly likely to return 15% pa TSR over the next 5 years. This is based on my view of ROE, EPS growth and DPS growth based on analysis with a conservative MOS. I accept the view that this is "a discretionary method that requires a fair amount of self-belief on the part of the value investor" but it seems to work well for me .

This approach means that I have limited buying opportunities, the price I am prepared to buy at generally only comes into play when external events such as Greek Defaults or Product Recalls affect market sentiment.

The "problem" that I have had over the past 6 months is that having waited patiently to buy something, you take the opportunity, and then find the market settles and you get a big jump in price (20-40%) in a very short period. Though this is obviously good, having spent a long time researching the stock I find it difficult to let it go as a degree of attachment has occurred:bad:

To address this, my portfolio tracking sheet starts flashing red at me when a stocks SP has risen to a level higher than my system predicted it would reach in 3 years time (based on my original 15% pa requirements). This indicates that the stock has moved from cheap to over-priced and it is time to take profits.

I still find it difficult to sell as my basic philosophy is to buy for long-term holds but applying the same discipline to selling as buying has meant that selling over-priced stocks (in my opinion of course) at least occurs now. Still hurts when the price continues to increase after having sold

 

[Julia]

Low debt, good liquidity, increasing profits and sound management/past performance are common to us both, but I like to try to buy on a resumption of uptrend after a dip in my inexact attempt to get a good company at a reasonable price. Sometimes I just let a buy order well below current price sit in the market in case I get filled on daily volatility - have been lucky once or twice.

I'd have thought this was a given, but it does raise the question of how value investors buy into a company.
Could one of you perhaps comment on this? eg if you decide a company is trading below your IV, will you look at a chart to determine an appropriate entry and place a limit order accordingly? Or is your lack of interest in the market price sufficient to render the actual entry point irrelevant?

Sounds pretty good - out of interest, if you are stopped out of a company with good liquidity, increasing EPS and DPS, yield has obviously become bigger, and management remains the same - will you buy back in at a lower price? If so, under what circumstances? Say you had a 5% trailing stop loss, would you buy back in if it has dropped 20%? Or only buy back in on another uptrend, irrespective of price (subject of course to yield)?

herzy, I don't have any hard and fast rule about this. I can think of two instances when I'd have been better holding through the downturn than selling, viz CBA and MND.
At the time of the GFC, bearing in mind that my absolute focus is capital preservation, I just sold everything when I became convinced a big fall was starting.

Having been out of the market for a few years now, I'm sufficiently disenchanted with the 4.75% interest on the small amount I have at call (not quite $100K) that I'm looking at putting most of it back into the market. The rest is tied up in term deposits taken out when rates were much higher.

What I buy will definitely have to be in an uptrend. Am dithering about CBA. It's a proven winner over many years, but has run hard. That's no reason why it can't continue upward, though, given the numbers of people like myself who don't find under 5% a reasonable return . At the same time,there's much potential imo for a GFC MK2.
I don't know if this actually answers your question. Sorry to be unhelpful.

 

[DocK]

Another very interesting thread on a topic that probably takes up more mind share for me than when to buy.

As a 95% FA (admit to glancing at charts following committing to buy decision), I have found that best approach to selling is to follow same rules that I used to buy.

Buying for me is based around having a strong degree of confidence that purchasing stock XXX at Price $n.nn is highly likely to return 15% pa TSR over the next 5 years. This is based on my view of ROE, EPS growth and DPS growth based on analysis with a conservative MOS. I accept the view that this is "a discretionary method that requires a fair amount of self-belief on the part of the value investor" but it seems to work well for me .

It's the self-belief aspect that would be a major hurdle for me - I think I'd start second-guessing my calculations and decision-making ability if price started to fall.

This approach means that I have limited buying opportunities, the price I am prepared to buy at generally only comes into play when external events such as Greek Defaults or Product Recalls affect market sentiment.

The "problem" that I have had over the past 6 months is that having waited patiently to buy something, you take the opportunity, and then find the market settles and you get a big jump in price (20-40%) in a very short period. Though this is obviously good, having spent a long time researching the stock I find it difficult to let it go as a degree of attachment has occurred:bad:

Again, I know without a doubt that I'd feel likewise, and the unemotional aspect to technical trading suits my goals and personality. I've found myself looking for fundamental reasons to hold a stock that has hit my exit criteria at times, and have to go back and revisit charts of shares I've sold in the past to remind myself why following the system works best for me.

To address this, my portfolio tracking sheet starts flashing red at me when a stocks SP has risen to a level higher than my system predicted it would reach in 3 years time (based on my original 15% pa requirements). This indicates that the stock has moved from cheap to over-priced and it is time to take profits.

I still find it difficult to sell as my basic philosophy is to buy for long-term holds but applying the same discipline to selling as buying has meant that selling over-priced stocks (in my opinion of course) at least occurs now. Still hurts when the price continues to increase after having sold

This is what I struggle to understand. Having made a great entry, and being well in profit sooner than you thought, why cut your profit rather than maybe run a tightish trailing stop to keep you in the trade should it decide to return you 20%pa or more? Do you have stats on how often your discipline has worked in your favour and have often you'd have been better off being naughty? Would be interesting validation or not wouldn't it?

 

[RottenValue]

That is a good question and reality is that I have never bothered to track "what-ifs" after deciding to sell - gut feel is that in most cases I would have been better off holding but this goes against my basic philosophy. I like my portfolio to be highly likely to generate 15% pa growth per year - once a stock is overpriced (in my opinion), it may keep increasing in price but not at my desired rate (I expect it to fall or flatline).

I know this may sound strange but my preference is for the stock to just slowly increase in value Year on Year so it stays in my value range so you never are put in the position of considering selling them as being over priced.

As an example, I bought CCP in Feb last year for $4.70 back in February as it met my criteria. Good final year result reported, dividend paid and then it has jumped above $8 in November. That's what I view it as being worth at the end of 2015 so couldn't justify holding it. Price may go up or down from here (and it has!) but I wouldnt but it at this price so struggling to justify holding it.

Money off table, reallocate to stocks that offer greater likelihood off meeting my 15% pa guidelines. I find the discipline helps even though I would have preferred a more gentle increase and hold it for years as still believe it is a good company, just overpriced.

 

[Julia]

That is a good question and reality is that I have never bothered to track "what-ifs" after deciding to sell - gut feel is that in most cases I would have been better off holding but this goes against my basic philosophy. I like my portfolio to be highly likely to generate 15% pa growth per year - once a stock is overpriced (in my opinion), it may keep increasing in price but not at my desired rate (I expect it to fall or flatline).

I know this may sound strange but my preference is for the stock to just slowly increase in value Year on Year so it stays in my value range so you never are put in the position of considering selling them as being over priced.

As an example, I bought CCP in Feb last year for $4.70 back in February as it met my criteria. Good final year result reported, dividend paid and then it has jumped above $8 in November. That's what I view it as being worth at the end of 2015 so couldn't justify holding it. Price may go up or down from here (and it has!) but I wouldnt but it at this price so struggling to justify holding it.

Money off table, reallocate to stocks that offer greater likelihood off meeting my 15% pa guidelines. I find the discipline helps even though I would have preferred a more gentle increase and hold it for years as still believe it is a good company, just overpriced.

With respect, it sounds rather as though you have at the outset decided on an approach and are determined to stick with it, even if there might be evidence that you could adapt it to be more profitable.

I know I started out with no regard for the usefulness of charts, but gradually realised I was missing out on a valuable resource.

There seem to be quite a few people with closed minds as to what is useful. Personal choice, of course, but I just don't quite understand why you'd feel obliged never to concede there is something more to be learned.

 

[Ves]

I'd have thought this was a given, but it does raise the question of how value investors buy into a company.
Could one of you perhaps comment on this? eg if you decide a company is trading below your IV, will you look at a chart to determine an appropriate entry and place a limit order accordingly? Or is your lack of interest in the market price sufficient to render the actual entry point irrelevant?

I don't look at charts to make purchase or sell decisions.

This exposes me to "premature accumulation" (haha) but on the flip-side it also means I won't be left with an error of ommission and waiting for lower prices that do not happen.

I am buying long-term streams of free-cash flow. If these are on offer for less than my intrinsic value calculations less an appropriate margin of safety (ie margin for error) then there is no reason why I should not buy now. I am not going to sell these until my investment thesis is defeated.

The IV calculation is the very last thing that I do. In 99% of cases I don't even calculate an IV because my personal judgment tells me that it is irrelevant because I either do not understand the business or the future is too uncertain / not promising / it doesn't meet my risk management criteria.

If I do not buy when there are prices are on offer that meet my IV calculation then I am second guessing my whole process and there would be no point doing it all in the first place.

 

[McLovin]

I'd have thought this was a given, but it does raise the question of how value investors buy into a company.
Could one of you perhaps comment on this? eg if you decide a company is trading below your IV, will you look at a chart to determine an appropriate entry and place a limit order accordingly? Or is your lack of interest in the market price sufficient to render the actual entry point irrelevant?

I never look at charts, I find them distracting. The market price is of course of interest, it is what I will end up paying. The actual entry point, in terms of whether the SP has been moving up, down, sideways is not of interest to me.

I'm interested in swapping capital for cashflow. And I'm not too bad at it.

The IV calculation is the very last thing that I do. In 99% of cases I don't even calculate an IV because my personal judgment tells me that it is irrelevant because I either do not understand the business or the future is too uncertain / not promising / it doesn't meet my risk management criteria.

+1

 

[tech/a]

I'm interested in swapping capital for cashflow. And I'm not too bad at it.


+1

That's the easy part.
Harder to preserve capital while
Generating cash-flow.
Even harder increasing it.

Lose sight of capital preservation ( it's not a loss unless I take it )
At your peril.

 

[Ves]

That's the easy part.
Harder to preserve capital while
Generating cash-flow.
Even harder increasing it.

Lose sight of capital preservation ( it's not a loss unless I take it )
At your peril.

I think you will find that a good value investor is a lot quicker to take a loss than you seem to be giving them credit.

 

[McLovin]

That's the easy part.
Harder to preserve capital while
Generating cash-flow.
Even harder increasing it.

Lose sight of capital preservation ( it's not a loss unless I take it )
At your peril.

Of course capital preservation is important. When a business changes, I change my opinion. I just don't think I find it in a chart. I realise others do and I'm not planning on getting into a debate about it. The question was about whether value investors look at charts.

 

[tech/a]

Of course capital preservation is important. When a business changes, I change my opinion. I just don't think I find it in a chart. I realise others do and I'm not planning on getting into a debate about it. The question was about whether value investors look at charts.

The one thing I see as an issue is the same thing I
See when value investors make a buy.

That's when it's recognized by the market as a whole
If ever.

Often " value " won't be recognized by the wider market
And price continues to drop. Value investors continue to buy.

When the same value investor sees a change in the business
Then the same thing often occurs and the market as a whole
Doesn't react in the way expected,by the time it is the business
Dynamic has altered again!

Ves
I just haven't seen it.

Not an arguement just an observation over the years that has been
The driving reason I don't try to value a company---it's just too slow.
And far too time consuming.

 

[burglar]

... And far too time consuming.

Before you've calculated fair value, the fun is over.

 

[Ves]

Ves
I just haven't seen it.

Look at the ASZ thread. I sold at 70 odd cents - and I admit I was slow selling. But I still sold before the steam roller hit. Look at the price now.